I just posted a new paper on SSRN entitled "The Modern Business Judgment Rule." It's short, so it won't take long to read, especially if you skip the footnotes. My goal is to describe this complex doctrine in simple terms, but the paper is packed with insights that were new to me, even though I have been teaching and writing about this subject for 20 years. Here is the abstract:
For over 150 years, the business judgment rule performed a relatively straightforward task in the corporate governance system of the United States, namely, protecting corporate directors from liability for honest mistakes. Under the traditional version of the business judgment rule, when the board of directors is careful, loyal, and acting in good faith, courts refuse to second-guess the merits of the board’s decisions, even if the corporation or its shareholders are harmed by those decisions.
While modern courts continue to insulate directors from liability for honest mistakes according to this traditional formula, in the 1980s Delaware courts began assigning the business judgment rule a more expansive role. The modern business judgment rule is applied not only in cases without procedural infirmities, but in cases where procedural infirmities at the board level have been mitigated by a special committee, stockholder approval, or partial substantive review by the court. In these new contexts, a court must satisfy itself that a board decision is worthy of respect, not because the decision was substantively correct, but because the effect of the procedural infirmities was sufficiently muted. After the court reaches that point, the business judgment rule “attaches” to protect the substantive merits of the decision from (further) review.
The modern business judgment rule is not a one-size-fits-all doctrine, but rather a movable boundary, marking the shifting line between judicial scrutiny and judicial deference. In describing the transformation of the business judgment rule, this chapter focuses on Delaware judicial opinions, with special attention to cases involving mergers and acquisitions, where the most important changes in the business judgment rule have been forged. The scripting of the business judgment rule’s new role by the Delaware courts is a work in progress, and the current law is inconsistent and confusing. Nevertheless, I trace the development of the modern business judgment rule and attempt to rationalize that development around the simple idea that the rule guides courts through the review of director conduct and marks the point at which judicial evaluation of a decision ends.
I hope you find this paper worthwhile. Comments and insights are most welcome.
Corporate Governance, Corporate Law, Delaware, Fiduciary Law | Bookmark

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